For all of the bold talk of reform, the provisions of the Senate
Finance Committee bill are simply more of the same. This is evident
in the way the committee is evading the systemic problems that
Congress created with its updates to its flawed Medicare physician
fee schedule.

Since the federal government apparently cannot ensure
beneficiary access in the current Medicare program--and since
government price controls like those used in Medicare do not
work--trapping more Americans into such a system through a
government health insurance plan does not make sense.

Medicare Payment Update

Medicare reimburses doctors and other medical professionals for
their services according to a congressionally created fee schedule
that is annually adjusted by the Sustainable Growth Rate (SGR)
formula. Enacted in the 1990s, the SGR is primary evidence of how
Congress tries and ultimately fails to "bend the curve" of the
health care costs in Medicare.

The idea is relatively simple: If Medicare spending grows faster
than our overall economy (which is almost always the case), then
payments to Medicare providers are to be reduced proportionately to
keep expenditures in line over a period of time. Each year, the
Centers for Medicare and Medicaid Services estimates how much the
physician fee schedule update will have to be reduced the following
year in order to meet the target Medicare expenditures on physician
payment. The 2010 update, for instance, reflects expenditures from
April 1, 1996, to December 31, 2009.

A Political Volcano

If the SGR update goes into effect in 2010 as planned under
current law, it will result in massive Medicare payment cuts. But
every year, Congress--under both Democratic and Republican
leadership--routinely blocks the cuts from going into effect for a
year or two at a time. At the same time, House and Senate leaders
have left intact the underlying requirement to keep doctor payment
below the rate of GDP growth.

Subsequently, the necessary cumulative cut in Medicare payments
grows bigger. Without a change to current law, payments to
physicians would be reduced by 21.5 percent as of January 1, 2010,
and by an additional 5.5 percent each year from 2011 through 2014
(and a small reduction in 2015).[1]

The Baucus Proposal

In his opening statement to the Senate Finance Committee on
September 22, Chairman Baucus acknowledged the failure to address
the problem: "On one point, I want to acknowledge up front that we
did not do as much to correct the payment of doctors under the
incredibly misnamed 'Sustainable Growth Rate.' The SGR needs to be
fixed permanently."[2]

But instead of fixing the SGR, the Senate Finance Committee bill
repeats the prior pattern by providing a payment increase for 2010
and then pretending it did not happen. The reason for this one-year
change in the update is obvious: Fixing the problem long-term would
cost $200 billion over 10 years.[3] Steny Hoyer (D-MD), the House
majority leader, rightfully called the Senate Finance Committee
proposal a façade.[4]

Earlier this summer, the American Medical Association told its
members that Congress would "erase" the SGR problem.[5] Fat
chance.

The Price of Price Controls

The SGR issue should be appropriately viewed as a microcosm of
current efforts to overhaul the health care system. The inclusion
of the SGR provisions in the Senate and House bills is a tactical
admission that Medicare beneficiaries' access to care is being
threatened--potentially a form of rationing. Two years ago, when
proposed SGR reductions were more modest than they are now, a poll
of physicians found that 60 percent would limit the number of
Medicare patients they accept and 14 percent would stop seeing
Medicare patients entirely if these cuts went into effect.[6]

The SGR does not even accomplish the objective it was created to
achieve: to bend the cost curve in Medicare. Payments to physicians
continue to exceed overall economic growth. Two years ago, Dr.
Cecil B Wilson testified that "spending targets cannot achieve
their goal of restraining volume growth by discouraging
inappropriate care. Spending targets apply to a whole group and,
therefore, do not provide an incentive at the individual physician
level to control spending. In addition, they do not distinguish
between appropriate and inappropriate growth because they apply
across-the-board to all services. In addition, spending target
systems are based on the fallacious premise that physicians alone
can control the utilization of health care services, while ignoring
patient demand, government policies, technological advances,
epidemics, disasters, and the many other contributors to volume
growth."[7]

Special Interest Lobbies

In addition to the budget problem, fixing the SGR poses a
problem for seniors as well. Physicians are paid out of Medicare
Part B, the Supplementary Medical Insurance Trust Fund (SMI)
portion of Medicare. Even though SMI is heavily subsidized by
taxpayers, non-disabled Medicare enrollees are required to pay 25
percent of Part B costs. (Originally, beneficiaries paid 50 percent
of the costs.) So if physician payments go up, the cost of the
entire program goes up, increasing the amount of the 25 percent
share that beneficiaries must pay.

Congress enacted a temporary "hold harmless" provision to shield
most seniors from a premium increase in 2010 because they will not
receive an increase in their Social Security benefits. The cost,
however, is passed along to other Medicare beneficiaries. Of
course, now that that reality approaches, Congress is considering
spending another $2 billion to pick up the tab.

Central Planning Failures

As SGR and the history of Medicare demonstrate, the federal
government has constantly intervened in the payment systems and
increased massive cost shifting. The classic scenario is constantly
repeated: Politicians over-promise (more benefits, lower costs to
the beneficiary), the budget hemorrhages, politicians apply a
tourniquet to stop the fiscal bleeding, and the short-term fixes
create even greater long term problems.

History, not hysteria, is why so many Americans (especially
seniors) are skeptical of the political promises of more while
achieving budget neutrality. Government cannot deliver more
services for less than the value of what is being provided.
Government surpasses the private sector only in its ability to hide
the true cost by forcing someone else to pick up the tab. Someone
has to pay, which means politicians are constantly trying to pass
the burden around like a hot potato among providers, beneficiaries,
current taxpayers, and future taxpayers. Whoever is left with the
unwanted cost protests, and the contest starts all over again.

The very idea that government is more efficient than the private
sector is comical. Why did so many state and local governments get
out of the direct delivery of health care services in the 1960s and
1970s? Because of government inefficiencies.

Medicare's SGR problem is another chapter in the big book of
government central planning, an epic failure and a fountain of
unintended consequences.

Dennis G.
Smith is Senior Fellow in the Center for Health Policy Studies
at The Heritage Foundation.